Three Easy Retirement Rules of Thumb

Everyone loves a simple way to measure progress. We use letters for grades and annual salary as way to gauge our performance relative to others.

It’s not the same as your “value” as a person, and it’s certainly unhealthy to use our achievements to keep score socially. Yet when it comes to finances, knowing where you stand is hugely important.

While you have enough to retire? Can you quit work feeling secure that your money will last?

Financial advisors will sit down with you and, for a fee, come up with very precise figures to answer those questions. Their services can be invaluable.

But you can get a good idea of how things are going by using retirement rules of thumb that anybody can figure out in just a few minutes.

1. Multiply your final salary

Fidelity Investments every year issues retirement savings guidelines in the form of a simple mathematical equation. Printed as a table, Fidelity suggests savers have 1 times their salary at age 35, then 2 times at 40, 3 times at 45, and so on in increments up to age 60.

At 60, you should have 6 times your salary at that age set side, then finally 8 times by age 67.  In dollar terms, a 45-year-old making $100,000 a year should have $300,000 in retirement savings at 45, yet a 67-year-old making $75,000 at retirement age needs $600,000 in hand by age 67.

The calculation provides very different numbers for people with different salary levels, but it presumes that your cost of living in retirement will be in line with whatever your really made while working, so that’s okay.

2. Subtract $1 million from Social Security

A couple who has earned a reasonable combined salary and qualified for the maximum Social Security benefit is likely to earn something on the order of $40,000 a year in retirement benefits, if they put off taking those benefits to the full retirement age.

Need more than $40,000 to live? Consider that $1 million conservatively invested will generate $40,000 as well. So, for each $1 million you control in retirement, you double your Social Security income. If you only need $60,000 to live, well, you need just $500,000 to retire.

3. Make sure your investments perform

A well-invested portfolio is likely to double in value every 10 years  or so. So what does that mean for your retirement? If your plan is to get to $1 million, then you have to have $500,000 about a decade before your retirement target.

That means having $250,000 about two decades before your target retirement age, and so on. A 7.2% annualized return will do that, if you can sustain it year in and year out.